The Financial Conduct Authority has launched a major review of defined contribution (DC) pensions rules.
In a discussion paper published today (12 December), the regulator said the rate at which the pensions market is changing raises “important questions” about how the system can best support consumers.
A programme of policy change across government and regulators is underway.
The discussion paper pointed out that there has been a shift from defined benefit (DB) pensions to DC, placing greater responsibility on consumers to save enough for their retirement.
The introduction of pension freedoms has increased the volume and complexity of choices for consumers about how to use their DC pension savings through retirement.
In response to these market changes, a programme of policy change is currently underway.
This includes phase one of the government’s pensions review and the FCA’s consultation on the details of a value-for-money framework that aims to make sure that DC workplace pensions work harder for pension savers.
The FCA is launching the review alongside its first consultation under the Advice Guidance Boundary Review (AGBR), proposing targeted support reforms in pensions.
As part of the review, the regulator will look in detail at the regulatory framework that governs projections, tools and modellers, requirements for individual DC pension transfers and consolidation and the regulatory framework for Sipps.
Interested parties have until 27 February 2025 to comment on the paper, before the FCA decides whether there is a case for making adjustments to its rules and guidance.
If it decides there is, it will then consult on any changes in the normal way.
AJ Bell director of public policy Tom Selby said: “The FCA has set its stall out today when it comes to pensions, with a clear-eyed focus on ensuring savers and retirees get better support when making often complex financial decisions.
“In addition, the regulator wants to kick the tyres of existing pension rules to ensure they aren’t undermining this engagement drive.
He said the regulator “deserves credit” for taking an “open, pragmatic approach” that focuses squarely on delivering good outcomes for consumers.
“Current rules governing projections – essentially a guess at what your pension might be worth decades in the future based on a number of variables – are ripe for review,” he added.
“If it is the case that adopting three different projection values results in disengagement then the case for change is clear.
“Ultimately, none of these numbers are going to be bang on the money – they are simply designed to help give a rough idea of where you might end up.
“The goal of any changes to projections rules must therefore be simplification to ensure they don’t act as a barrier to engagement.”
Selby said ensuring pension transfers work as efficiently as possible is also of “crucial importance”.
He insisted a sensible balance needs to be struck here between protecting savers from criminals attempting to steal their hard-earned retirement pot and slowing down perfectly legitimate transfers to reputable firms.
“This will likely require engagement with Department for Work and Pensions, which sets the terms for so-called ‘amber’ and ‘red’ transfer flags designed to protect people from scams.
“It is also vital that savers consolidating their pensions with a provider consider the overall value of the firm they are transferring to, taking into account things like costs and charges, investment choice, service and retirement income options.”
He said Sipps have evolved to become an “integral part” of the modern, mainstream pensions market.
“Given the significant growth we have seen in the UK SIPP market, particularly since pensions were made more flexible in 2015, it makes sense for the FCA to review its approach to make sure it remains fit for purpose,” he added.
“This will need to balance ensuring consumers continue to be adequately protected without unnecessarily burdening firms who already have good consumer outcomes baked into the way they operate.”
Existing projections are utterly meaningless. We have encountered many situations where the projections imply a negative RIY, i.e. the provider is paying the customer to invest, complete nonsense.
Agree with Graham Ponting. Current illustrations are immensely lengthy and confusing for customers and serve limited meaningful purpose. They need to be succinct – and the basis upon which they are prepared needs to be clear at a glance. Most customers cannot understand current illustrations at all – because the immense details serves as a deterrent to reading them. Customers want to know what a portfolio will cost them – not every constituent part.